Arbitration|Conflict Resolution|Ethics|Mediation

Third Party Funding in Arbitration — Ethics and Best Practices

In March 2017, New York Law School and the American Arbitration Association convened a discussion of “Hot Topics in Arbitration,” one of which involved third party funding.  The event was taped and the provocative discussion can be viewed here.

The issue is also addressed in a terrific article appearing in the Spring 2017 issue of the New York Dispute Resolution Lawyer.  Professor Elayne E. Greenberg of St. John’s Law School evokes circumstances “When the Empty ADR Chair is Occupied by a Litigation Funder,” and her succinct observations make dandy reading.

After reviewing the landscape of the legal and ethical status of what used to be called “champerty and maintenance,” Prof. Greenberg settles into a frame of discussion that I find very comfortable — analogizing to the insurer’s duty to defend, she refers to the settled ethical principles arising from a lawyer’s representation of a client when legal fees are paid by a third party with an interest in the progress of the defense.  These principles boil down to two cautions — (1) A  lawyer must take care not to impinge on the exercise of independent legal judgment on the client’s behalf, and (2) a lawyer must be aware of the risk of the loss of privilege to the extent that communications take place with the non-client funder.

Applying these ethical principles to arbitration and mediation, Prof. Greenberg concludes that “lawyers participating in dispute resolution should be ethically required to disclose the identity of litigation funders at the time that the lawyers and their clients consent to participate in dispute resolution.”  More to the point, she postulates that “arbitrators and mediators must know the identity of litigation funders… if these neutrals are to conduct these dispute resolution procedures in accordance with their ethical mandates and maintain the integrity of the arbitration and mediation procedures.”

I confess this clear-cut statement is new to me, but makes perfect sense in the face of an increasing trend of non-parties with financial interests in the arbitration.

 Prof. Greenberg gives five justifications for this bright-line rule, only two of which (it seems to me) relate to arbitration: (1) Disclosure is needed to ascertain conflicts between the neutral and the funder; and (2) disclosure is needed to ensure that all participants’ procedural justice expectations are satisfied.

The other three points seem to relate more specifically to mediation: (1) Disclosure is needed to enable the neutral to understand the interests that need to be addressed’ (2) disclosure is needed to “uncover all the invisible pulls that may be dictating settlement terms”; and (3) disclosure is needed to ensure that all interested parties agree to abide by confidentiality obligations.

Greenberg notes that disclosure does not address all of the ethical and procedural challenges that third-party funding addresses.  But she has identified a salient part of any discussion of the issue, and her article is a contribution for that alone.

(The issue, edited by Edna Sussman, Sherman Kahn and Laura A. Kaster, is simply splendid, and is alone worth a year’s worth of dues to the New York State Bar Association,

1 Comment
  1. For the sake of continuing the dialogue , I question whether arbitrators really need to know who is funding the matter for one or more parties. And if arbitrators really do need to know this information, does that include funding by in-laws?Loans from banks? Pawn shops? Church groups? For the sake of argument, I would submit that an expansion such as this of the duty to disclose would only lead to mischief.

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